An outsourcing contract can be responsible for creating a strong relationship with the global sourcing provider, but can also cause a project’s failure.  Therefore, it is important to understand the contract terms and conditions, before signing any agreements with the global sourcing provider.

Outsourcing arrangements generally last for several years, which is why it is essential for buyers to recognize the terms and conditions in which they are agreeing to abide.  Global sourcing providers will want to make sure that their interests are being protected and they will create a contract that reflects this protection.  However, it is possible to have a contract that protects both parties, as long as the time is taken to review the terms and conditions to determine the relative position of the contract.

When evaluating the terms and conditions of a global sourcing contract, the buyer should know what key elements should be included.  The terms and conditions of most global sourcing contracts will include such components as scope of work, performance expectations, security procedures, responsibilities, pricing and termination conditions.  Other areas that are often addressed in the terms and conditions of global sourcing contracts include governance, rights of recourse and pricing. 

Some companies frequently include reward and penalty clauses in the contract, which include incentives or rewards for achieving certain goals and expectations and sanctions or penalties for non-performance and failure due to gross negligence.  The termination provision also becomes an important component in this area as the reasons for terminating the agreement should be clearly defined.  The termination clause may include termination for cause, termination for convenience, change of control and flexibility of termination. 

Global sourcing contracts should also incorporate remedies for dispute resolution and identify the jurisdiction in which the resolution should take place.  This jurisdiction should not be so slanted that it is unfair to the buyer and could cause the buyer to not be able to obtain a prompt, neutral and cost effective resolution to the dispute.

Before signing the contract, the buyer should carefully review the terms and conditions to identify any areas that may need to be negotiated.  An attorney or industry expert can help determine the level of protection for the buyer by thoroughly analyzing the contract.  Understanding the terms and conditions of the global sourcing contract can help the buyer find success with the outsourcing arrangement.

A&E Consulting provides assistance to companies looking to outsource, by helping develop an organizational global sourcing strategy, searching and evaluating global sourcing providers and establishing the outsourcing program.  In addition, A&E Consulting will oversee the first outsourced project to ensure a smooth transition.

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After choosing the appropriate outsourcing provider the negotiation begins.  One of the biggest and most common mistakes made by IT executives is focusing on price when it comes to negotiations.  The focus on price often leads to disappointment and frustration for both parties, which is why IT executives can greatly benefit from focusing on other essential aspects of the contract as well.  The negotiation process is crucial in establishing the outsourcing relationship, which can last for many years and it is important that buyers understand how to prepare to negotiate.

A global sourcing contract is what defines the relationship and the requirements of each party.  Both parties involved in the outsourcing arrangement must be comfortable with the terms and conditions that are agreed upon.  The contract should include such items as the scope of work, pricing model, expectations, deliverables, performance measures, deadlines and termination conditions.  All of these issues should be thoroughly discussed before a contract is signed.  There should not be any components of the contract that could be considered “gray” areas, as everything contained in the agreement should be clearly expressed.

It is to a buyer’s advantage to take the time to adequately prepare for the negotiation.  A company looking to outsource should understand objectives and needs for the outsourced projects, which will help maintain a better focus on the key issues when negotiating with the global sourcing provider.  IT executives should also define and prioritize these issues and their approach and strategy for obtaining their objectives.  

A strong global sourcing contract is one that balances the interest of both parties.  The contract should be as balanced as possible to protect the interests of both the buyer and global sourcing provider.  When the contract is clear and well-negotiated, it can maximize the effectiveness of the arrangement.

Before signing the contract, the document should be thoroughly reviewed, preferably by an attorney or industry expert.  All of the agreed upon terms and conditions should be specified in the contract to avoid future problems. 

The negotiation process for global sourcing agreements can be time consuming and it often takes longer than anticipated.  Global sourcing providers sometimes take a substantial amount of time to respond to buyers.  However, a buyer should never cut corners when negotiating with a vendor as a well-thought out negotiation is well worth the effort.

A&E Consulting helps companies looking to outsource by assisting with the development of an organizational global sourcing strategy, searching and evaluating global sourcing providers and establishing the outsourcing program.  In addition, A&E Consulting will oversee the first outsourced project to ensure a smooth transition.

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Despite the slow economy, some opportunities can be found in the information and communication technologies (ICT) sectors, according to a recent report by Frost & Sullivan.  The report states that some IT projects will be put on hold during the unstable market, but there will be many new opportunities within the industry. 

Four areas of expected ICT growth were identified, which include the following:

• Sustainable IT
• Outsourcing services, managed and hosted services
• Information management tools
• Services that support mergers and acquisitions

“In particular, ICT solutions that shift costs from a capital to variable component, focus on productivity increases and cost reduction, and support organizational restructuring and acquisitions are likely to see growing demand,” says Andrew Milroy, ICT director at Frost & Sullivan. 

The report predicts that investments will be made in sustainable technology within existing infrastructure, such as virtualization, videoconferencing, thin clients and power consumption modeling, as these capabilities are able to reduce costs while increasing green initiatives.   A greater focus on variable costs is estimated to lead to an increase in popularity of software-as-a-service (SaaS) and hosted service models.

Business travel will most likely decline, which will create a greater need for conferencing tools.  These conferencing tools will also allow more employees to work remotely, which will reduce travel costs and emissions.  As a result, there will be new opportunities for providers of secure remote access solutions.

One of the major areas of expected growth among the ICT sectors involves IT outsourcing.   Many organizations are looking for ways to cut back on costs and IT outsourcing provides a way to accomplish this goal.  Plus, outsourcing to a global sourcing provider allows companies to better focus on core competencies and increase productivity.  Global sourcing providers are expected to reap the greatest benefits to this anticipated growth.  Frost & Sullivan cautions in the report that contract terms can be expected to fall significantly.  Companies can use the advice of experienced IT outsourcing consultants to ensure that the contract terms are in their favor.

The authors of the Frost & Sullivan report believe that there will be new opportunities in both traditional and non-traditional areas of managed services, including managed handsets, network services and leasing services.  According to the report, there should be an increase in mergers and acquisitions as the economy continues to weaken.

Based on this Frost & Sullivan report, it is safe to assume that a slow economy will benefit some areas within the IT industry, while negatively impacting others.  Global IT sourcing is a great way to lower costs during this economic slowdown.  A&E Consulting helps organizations weigh the benefits of outsourcing and also assists in choosing the right outsourcing partner.  The consulting firm will even oversee the first outsourced project to ensure a smooth transition.

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China has made many recent changes that have impacted U.S. businesses outsourcing to the country.  Within the outsourcing industry, China has been well known for its low cost of labor, which attracted many companies wishing to outsource various functions.  However, with China’s new regulations and economic changes, outsourcing to this location has become increasingly expensive. 

Many environmentalists, economists and labor advocates are pleased with the changes that have been implemented by the Chinese government.  Some experts feel though, that China’s moves may put a financial strain on smaller U.S. businesses that have been outsourcing to this country.

An article posted on CNNMoney.com titled, In China, Outsourcing is No Longer Cheap, examined these recent movements.  Some of the key points of the article are summarized below.

New Labor Laws
A strict labor regulation went into effect on January 1, 2008 in China, which mandated employers to offer employment contracts, overtime pay and a social security program.  It is believed that this law was the direct result of internal political dynamics.  There had been a growing public outcry regarding low wages, insufficient labor rights and economic inequality.  Recent studies have shown that the wages in China are increasing by 10 to 15 percent each year.  That statistic, along with the tough labor law, has made many businesses nervous.

Auret van Heerden, President of the Fair Labor Association, was quoted in the article as saying, “There’s a feeling that this law might be too much, too soon.  HR is a recent discipline and the courts are starting to get overwhelmed.”

Environmental Reform
China has been making great efforts at environmental reforms.  In 2006, the Chinese government started a 5-year plan to increase the country’s energy efficiency by 20 percent between 2006 and 2010.  China anticipates that by 2020, renewable energy will account for 15 percent of its national consumption.  There has also been a greater enforcement of safety and cleanliness rules that had been in China’s plans for a while.

Last summer, China took emergency measures to address air pollution due to the Olympic Games.  As a result, many factories were forced to stop or slow production.  Some of the factories were later re-opened, but many were not. 

Eliminating Tax Rebates
China had been allowing tax rebates for exporters since 1985, but recently these rebates were cut.  Over the last few years, Beijing has drastically cut rebates on thousands of goods across a range of industries as a way to reduce China’s trade surplus.  China charges a 17 percent value-added tax (VAT), which is placed on added value of goods and services that is incurred in any exchange.  Exporters were usually given a full rebate on this tax, but that has changed.  China will now only offer VAT refunds ranging from 5 to 17 percent.  For goods that are considered to cause high pollution during the manufacturing process, the tax rebate has been cut all together.

Rising Chinese Yuan
The weakening U.S. dollar has also been compounding problems for many U.S. companies outsourcing to China.  In 2007, the Chinese Yuan rose more than 10 percent against the dollar.  Chinese vendors are typically paid in Yuan, which has placed a large financial strain on profits for many businesses in the United States.

Despite all of these changes, China still has a lot to offer a company looking to outsource.  A&E Consulting offers valuable insight into the outsourcing industry and helps businesses in choosing the right location and vendor.  The consulting firm will also oversee the first outsourced project to ensure a smooth transition.

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One of the most common questions asked by businesses is – when is the right time to outsource to an IT service provider?  There is no simple answer to this question, as it will depend on specific details related to each individual organization.  Too often, companies decide to outsource solely based on the cost savings, which should not be the main motivation. By analyzing internal resources and other variables, executives can make an informed decision regarding outsourcing.

Global sourcing is a powerful strategic tool that when used at the appropriate time, can help businesses increase productivity, reduce costs and focus on core competencies.  It can make an organization more productive and profitable.  When deciding whether to outsource IT development, there are some important considerations to keep in mind.  For example:

• Would outsourcing a particular IT project cause the company to lose business knowledge? 
• Is the IT project something that is routine? 
• Are there enough internal IT employees to complete the project?
• Would it be cost effective to send the work to a global sourcing provider versus keeping the project in house? 
• By outsourcing, would resources be better allocated to strategic business matters? 

These are essential questions that should be addressed before making the decision to outsource to a vendor.  Once the decision is made to pursue outsourcing there are some ways to ensure that the right global sourcing provider is chosen. 

Before signing any contracts, research should be conducted.  Some of the key criteria in choosing a vendor include the vendor’s size, industry expertise, employee qualifications, communication capabilities and security measures.  The location of the vendor is also a significant issue and each country boasts its own advantages and disadvantages.  Language, government support and education are among the many factors that should be analyzed when deciding on a destination for the IT project.  Finding the right vendor is crucial in the success of an IT project and a vendor that fits well with one organization, may not align with another.

Companies looking to outsource should also have an established plan to handle the relationship with the global sourcing provider.  A manager should be assigned the task of overseeing the outsourced project to ensure its successful competition. 

A&E Consulting offers valuable insight regarding outsourcing decisions.  The consulting firm assists companies with assessing whether global sourcing makes sense and what processes should be outsourced.  A&E Consulting will also oversee the first outsourced project.

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Indian service providers are gaining their share of the global IT market, according to Gartner Research.  Gartner believes that this increase in market share is the result of buyers breaking down large, multibillion orders into smaller ones that can be handled by Indian suppliers and growing customer confidence.

The top six Indian global sourcing providers, which include Satyam, Wipro, Infosys, Tata Consultancy Services, Congizant and HCL Technologies, made up approximately 2.4 percent of the total global IT services market in 2007.  There was a 0.5 percent increase in market share from 2006 and there has been exponential growth over the last few years.  Many experts speculate that India’s market share will continue to grow.

India has become a top destination for global IT sourcing for many reasons.  The country boasts low labor costs, highly skilled professionals and strong government support.  Indian suppliers have continued to provide buyers with high quality work at reasonable prices.  A large majority of IT employees in India are fluent in the English language, which makes communication easier between the buyer and supplier.

India’s growth in market share has also been the result of the vendors’ strength in application development and maintenance.  Global IT sourcing providers have been able to obtain larger orders for application development and maintenance and it is estimated that they have about 40 percent of the market.

Some challenges exist for Indian service providers, such as growing staff expenses, staff attrition, the weakening dollar against the Indian rupee and the country’s dependence on the U.S. market, which makes up approximately 60 percent of their sales.  Also, large companies like IBM and Accenture have set up offices in India to benefit from the country’s lower labor costs.

Many of the Indian global IT sourcing providers are looking to buyers in other countries as possible sources of revenue.  These suppliers are trying to lessen the dependency on the United States.  Attempts to tap other markets have already been successful as the Indian service providers’ share of the total Western European IT services market has increased.   The top Indian global sourcing providers have also been adding services to boost revenue, such as remote infrastructure management.

While India is a great destination for global IT sourcing, there are many other countries that offer benefits to buyers.  A&E Consulting offers insight into choosing the right location for global outsourcing and will oversee the first outsourced project.

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While there is a lot of speculation regarding the condition of the U.S. economy, Gartner Research believes that offshore outsourcing, also referred to as offshoring, will continue to grow during the economic slowdown.  Companies will look to IT service providers to increase the percentage of labor in offshore, lower cost locations.

Businesses are focusing on cutting costs, which is increasing the popularity of offshoring.  As companies look for ways to cut costs while still maintaining productivity and maximizing profits, offshore outsourcing will become an even more attractive option.

Current activity within the outsourcing industry shows that companies still outsource even when the economy is slow.  According to Gartner’s report, many U.S. companies are taking measures to quickly implement offshoring programs and are sending more jobs to offshore locations.  If the economic downturn is only temporary, there will be many first-time outsourcers looking to offshore IT providers.  In the situation where the economic downturn turns into a sustained recession, Gartner believes that IT budgets will be cut more aggressively, which will just increase the need for offshoring.

As more companies are turning to offshoring, the outsourcing destination will be one of the main considerations when choosing an IT service provider.  It is important for companies to carefully analyze the benefits and risks of each location to determine which country would best fit the organization’s needs.

TJ Singh, a research director for Gartner, commented on India as one of the main destinations for offshore outsourcing.  In a statement he said, “Factors that will give India the edge over other offshore locations are scale and quality of labor. North American and European buyers of IT services have been the force behind a growing offshore services market and India is central to almost any discussion of offshore services delivery for these buyers. Whether it is the indigenous India-centric service providers that have a wide-reaching impact on the IT services sector, or a vast and growing IT labor pool being trained to support a global client base, India will continue to be the most-sophisticated country option to source offshore IT services in the near term.”

Offshore outsourcing boasts many benefits for the IT sector, whether the economy is slow or not.  Some of the main benefits include expanded hours of operation, access to qualified IT personnel, ability for rapid scaling of operations and the opportunity to accelerate IT implementations.

For more information regarding offshore outsourcing, contact  A&E Consulting.

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